The number of IRS audits has decreased in each of the last five years. In 2016, only one in 143 individual taxpayers was audited. While audits are a necessary aspect of our tax system, it is safe to say most taxpayers will not lose sleep about the decreased likelihood of an audit.
Not all taxpayers will be flying under the radar, however. High earners have always faced a higher audit risk. In fact, a taxpayer with an income of more than $1 million is roughly ten times more likely to be audited than a taxpayer with income under $200,000. In 2017, the IRS has indicated that it will devote a larger share of its resources to pursuing high-earning taxpayers.
What is the IRS looking for?
The IRS isn't fully disclosing how it intends to scrutinize the assets of higher earners. It is likely that the IRS will proceed on multiple fronts, however. One step the IRS is sending out automated notices to taxpayers who claim substantial charitable contributions, large mortgage deductions, significant donations to 529 savings plans, or other large deductions. Taxpayers who provide proof of the legitimacy of deductions should be able to satisfy the IRS. These notices are the tip of the iceberg, however.
The "Wealth Squad" is getting involved
We wrote about the Global High Wealth Industry Group, known colloquially as the IRS Wealth Squad, a few months back. The Wealth Squad goes beyond the four corners of a taxpayer's return, instead taking a comprehensive view of a taxpayer's assets and potential tax liabilities. The Wealth Squad has had particular successes recovering taxes on offshore assets. In 2017, the IRS announced it will undertake campaigns on the following tax issues:
- Improper repatriation of funds
- S Corporation losses claimed in excess of basis
- Energy credits
- Corporate transactions and pass-through transactions between related entities
- Deferring ordinary income and short-term capital gains as long-term capital gains (basket transactions)
- Deferred variable annuity reserves and life insurance reserves
These are but some of the issues the Wealth Squad will focus on in 2017. The fact is, if the Wealth Squad has you in its sights, you need to take effective, decisive action.
Even with fewer resources, the IRS is still an imposing adversary that you should not take on alone. If you face an audit or have received a notice from the IRS, it is critical to retain skilled legal counsel at the outset. Based in Manhattan and serving a global clientele, the attorneys of Goldburd McCone LLP provide the highest caliber of representation in all types of tax matters.
Sources: This Year's Audits Are Bad News For The Rich, Bloomberg.com, Ben Steverman, February 28, 2017, Large Business and International Launches Compliance Campaigns, IRS, IRS Tax Audits Are Down for Their Fifth Year in a Row, Money.Com, Julia Zorthian, February 23, 2017